The IRS Just Sent Me $160,000. Can I Keep It?

We’ve probably all had the experience where a store cashier accidentally hands over too much in change, and we kindly point out the error and decline the windfall. We’re basically forgoing “free” money, but we feel good about doing the right thing and perhaps saving the cashier from later being personally penalized for the error.

But what if it were the faceless and evil-ish U.S. Internal Revenue Service that made the mistake? What would our instincts tell us to do then?

I recently received a letter from the IRS alerting me that it had made changes to my 2011 tax calculation. I’ve received such notices in past years. They usually affirm that, upon further evaluation, the IRS has concluded that I’ve underpaid my taxes by a few hundred dollars, and I obediently write a check for the required amount.

In this case, however, the change was in my favor. Significantly. A check just arrived from the U.S. Treasury, for $161,392.00.

Now what?

I’m almost certain the IRS made a mistake. I say “almost” because I don’t pay nearly as much attention as I should to my payments, deductions, carry-over losses, etc. It’s conceivable that I’m due a refund of this proportion, though an accountant points out that to have had excess FICA withheld of this magnitude, I’d have to have earned more than $3 million that year.

I’m an editor, with an editor’s salary. So when I say I’m “almost certain” that I’m not entitled to this refund, by that I mean I’m 100% certain.

Still, friends have offered conflicting advice on what I should do. Some argue that, since I normally pay when the IRS demands more, in this case I should take the windfall. Who knows if those earlier calculations were any more accurate than this one? The IRS giveth; it taketh away. If I’m going to suffer the downside, this argument goes, I should enjoy a rare upside.

Others say that would be unethical. It’s surely a mistake, and therefore it would be sleazy to try to keep the money. An amount like that could contribute in its own way to (pick your least objectionable option) safety net programs, defense spending, or paying interest on the U.S. debt. Sure, I could probably contribute to economic growth more directly, by buying a better car (if they actually now make a better car than my 2001 Ford Windstar) and a bigger TV. But again, the money’s not really mine to spend.

Then there’s a third consideration. Even if I were to try to keep the money, the IRS might eventually figure out its mistake and ask for the money back — plus interest and penalty. A subset of this argument holds that I could tuck the money away in a special escrow account and leave it there untouched. If after, say, three years the IRS doesn’t ask for it back, I could conclude that it’s safe to spend it.

What would you do?

The moral aspect is clear. This would be an ill-gotten gain. But I suspect most of us have a greedier inner self that would at least entertain rationalizations for profiting from an opportunity like this.

As a leader of my organization, however, I feel added pressure not to succumb to such rationalizations. Although this only concerns my personal finances, the fact that I serve as editor in chief of Harvard Business Review means I’ve implicitly accepted not only responsibility for defending the integrity of the institution, but also for having integrity myself. That means erring on the side of doing the right thing, even when the challenges may seem more gray than black or white.

If I were able to convince myself that I’m entitled to the money but were later accused by the IRS of trying to profit on its mistake, my colleagues would rightly question my values and I’d risk bringing embarrassment to both my employer and myself. This begs an interesting question: Do we act more ethically when we become leaders of companies because of the tacit expectations (and heightened risks)?

Life is full of ethical dilemmas. Every situation is unique, but one’s values can serve as a constant guide. In the July-August 2010 edition of HBR, Clay Christensen wrote a remarkable article, How Will You Measure Your Life? One message in particular stands out: Don’t cross the line and violate your principles, even if it’s “just this once.” As Christensen put it, “It’s easier to hold to your principles 100% of the time than it is to hold to them 98% of the time.” Once you make an exception, you’re on a slippery slope.

It’s a message that CEOs, political leaders, and the rest of us should always have in the back of our minds. And it’s the message (damn it!) that means the IRS is getting its $160,000 back.